Reference no: EM132058231

Starbucks From its first location in Seattle’s Pike Place Market in 1971, Starbucks has grown into one of the largest coffee chains with 16,635 locations in markets across the world in 2009. The company purchases and roasts high-quality coffee beans that are then brewed and retailed in trendy designer coffee shops that cater to a loyal following of young urban professionals who appreciate the distinct taste of Starbucks’ coffee. In 2009 its sales were US $9.774 billion, about two-third the size needed to be in the top 500 world firms. The company’s road to success began in 1985, when, after convincing the founders of Starbucks to test the coffee bar concept, the then director of retail operations, Howard Schultz, started his own coffee house to sell Starbucks coffee under the name Il Giornale. Within two years, Schultz purchased Starbucks and changed its company name to Starbucks Corporation. Since then, the company has expanded rapidly, opening stores in key markets and creating a “corporate coffee culture” in each of the urban areas in which it settled. Coffee bars are located in high- traffic areas and include large bookstores, suburban malls, universities, and high-traffic intra-urban communities. Popularity has not come without a price for Starbucks. Coffee prices fell considerably in the late 1990s and led to the displacement of thousands of farmers. The main reason for a fall in the price of coffee was the oversup- ply that arose from improved production techniques and from a crop boom in the 1990s. Although Starbucks only purchases approximately 1 percent of the global supply of coffee, its high profile has made it a main target for protes- tors who accuse the coffee giant of not providing a fair price to coffee growers; this, despite Starbucks’ policy of pur- chasing high-quality beans at premium market prices. To address the concerns of protestors, Starbucks introduced Fairtrade-endorsed coffee to its coffee houses. While the amount of Fairtrade coffee sold by the company is insig- nificant, at 1 percent of total sales, it is enough to portray the company as progressive and avert a consumer boycott. The company directly operates 6,764 coffee houses in the United States in 2009. Unlike many coffee and fast-food chains, Starbucks does not franchise (license the right to operate one of its stores) to individuals in the United States. It does, however, negotiate licensing agreements with com- panies that have control over valuable retail space, such as an airport or hospital. In 2009, there were 4,364 Starbucks stores operating under licenses. With coffee houses in 40 countries, today Starbucks has a global presence. In contrast to its domestic operations, the vast majority of Starbucks’ international operations are through licenses. Indeed, of 5,507 international stores in 2009, 3,439 were licensed and in joint venture. Starbucks might have operations in far-away countries like Australia, Oman, and China, but it is not global in its scope of operations. In 2009, 85.36 percent of its stores were located in its home region of North America, includ- ing operations in Canada, Mexico, and Puerto Rico. An even larger portion of Starbucks’ revenues and operat- ing income are home-region oriented. The United States alone accounts for 79.7 percent of revenues and 99 percent of operating income. International operations, including those that are directly owned and operated by Starbucks, require a higher degree of administrative support to be responsive to country-specific regulatory requirements. In addition, because these are mainly new markets, econ- omies of scale in marketing and production have not yet materialized. 1 Why does Starbucks rely on licenses for most of its international operations? Does the firm risk the dissipation of its managerial or technological advantages? 2 Can you argue that Starbucks is a global company regardless of the strong dominance of its home region in terms of sales and locations? Explain. 3 What accounts for the discrepancy between percentage of foreign locations and percentage of foreign net revenues? 4 What are some of the reasons why Starbucks chooses to retain operational control of its domestic operations?